A Steep Surprise: Why Early Dilapidations Review Is Crucial
By Alex Moat, Partner (Project & Building Consultancy) at Hartnell Taylor Cook
No matter the business, they will likely cause some form of wear and tear to an office during their stay. But, as you would expect, many only consider the repercussions of this damage at the end of their tenancy - despite the terms of a commercial lease obliging tenants to keep the property well-maintained throughout its duration. However, this approach to a tenant’s exit can leave both landlords and tenants burnt. Tenants can be suddenly faced with large dilapidation bills (sometimes costing tens of thousands) whilst forcing landlords to suffer from costly void periods as the property sits empty and unsuitable for market whilst being worked on. The solution here is simple yet effective – early dilapidations review – and it holds benefits for tenants (existing and prospective), landlord and building managers.
What is dilapidations review?
The key is being proactive. For landlords, monitoring a tenant’s occupation throughout the lease term is vital, as well as acting quickly once it is clear that a tenant is moving on. This includes preparing a Terminal Schedule of Dilapidations, either immediately after a tenant serves notice to terminate their lease or six to twelve months before lease expiry. By adopting this course of action, there can be an early understanding between both landlord and tenant as to what is expected in compliance with the yield up provision, enabling both parties to suitably prepare for lease termination.
Crucially, some commercial leases incorporate a provision that enables a landlord to recover their surveyors and legal costs attributed to the preparation and service of a Terminal Schedule of Dilapidations. As such, not only does this early action reduce voids and costs, it is in part cost neutral.
For tenants, this preliminary stage also enables them to instigate early discussions and complete works prior to expiry where needed. It is also important to note that in instances where a financial settlement is preferred, such early agreement and settlement enables dilapidations to be concluded prior to expiry, thus ensuring the landlord has funds to complete the works, so making the transition period better prepared for.
We are increasingly finding that in addition to the aforementioned formal approach to dealing with dilapidations, that in these difficult times we are encouraging our clients, be they landlords or tenants, to take a proactive approach to understanding the likely dilapidation liabilities linked to the occupational lease terms in the form of dilapidations assessments. This establishes early the likely quantum of any claim and affords transparency of the likely actions that the respective parties to the lease need to take in order to mitigate their respective losses and to agree the lease exit strategy.
Dilapidations during Covid-19
In the current climate, the issue of dilapidations has never been more pressing. With offices forced to close and remote working looking like a more viable long-term option for many businesses, tenants are increasingly reassessing their office leases. Some may downgrade to a smaller, more flexible space to reduce overheads until the immediate storm has subsided; some might need to move location to be closer to employees’ homes; and others might simply pack up their office altogether if this period has proven that the business can work effectively remotely. Either way, lease termination and regearing may be on the up. This also comes at a time when balance sheets might be tight for both tenants and landlords. But, by reviewing early, any costly void periods can be reduced by completing works early and hopefully some during the initial tenant’s lease. For tenants, it provides ample time to prepare the owed monies for any repairs to incurred damages.
However, social distancing measures must be factored into this. In light of current Government guidance, the process of preparing a Schedule of Dilapidations may take longer as the individual completing the review must do so in an environment that does not compromise their health and safety and that of any occupiers as each and every building and inspection needs to be fully risk assessed and agreed between all parties. For example, ensuring that social distancing is maintained during the building tour and that they are able to access the appropriate PPE.
Our business world looks very different these days – a business’ office requirements from 6 months ago may not serve them any longer, and so lease terminations, revisions and renewals must continue in the weeks ahead. As such, landlords, building managers and tenants must begin to create new socially distant ways of operating.
In any climate, the benefits of early dilapidations review are clear to see for both tenants and landlords. Although a process historically considered at the end, begin to encourage all parties to consider it at the mid-term, or throughout, to ensure that costs are minimised for all.